Home' Trinidad and Tobago Guardian : January 24th 2015 Contents vegetables are cheaper than the local products. If
we wanted to control the import of vegetables then
the fiscal measures of VAT/duty/taxes on such imports
would clearly be a more vectored approach.
Mary K King
SUNDAY BUSINESS GUARDIAN www.guardian.co.tt JANUARY 24 • 2016
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Dr Terrence Farrell, a respected econ-
omist, has advised that the
exchange rate be allowed to depre-
ciate to ensure it does not discour-
age exports and effective import
substitution. This is in the context
of a "real effective appreciation" of the T&T currency
over the past 20 years, since our economy has been
inflating faster than that of the US, our main trading
There are two concerns here. The first is that were
we to depreciate the exchange rate, would it really
continue to encourage exports and effective import
substitution? The general economic theory supports
Dr Farrell s position. However, the Central Bank of
Barbados Governor, Dr DeLisle Worrell, looks a bit
closer at economies like ours: small open economies.
In the circumstances of our severe reduction in
foreign exchange (FE) being now earned, he does
not recommend a devaluation/depreciation of our
currency since it will not help with the fundamental
problem of our economy; ie our economy cannot
respond quickly to this fall in FE income by producing
increased exports nor is it capable really of effective
Note that the energy sector brings in normally
some 80-90 per cent of the FE earned. Hence sta-
bilisation of the economy in the short term is more
about reducing aggregate demand on shore as
opposed to asking the private sector to expand exports
or create substitutes for imports. Aggregate demand
reduction can be done more directly if focussed on
specific imports via fiscal measures.
Also, some 75 per cent of the FE available in the
T&T market place is due to the energy sector
exporters who earn FE, changing some to pay for
local goods and services. If the exchange rate were
to depreciate whatever little they now put into the
market would be reduced assuming local goods/ser-
vice rates remain the same.
Secondly, Prof Michael Porter warns that it is
insufficient to focus on the macroeconomic infla-
tion-based measure---the real effective exchange rate
(REER)---when looking at the production in an econ-
omy since competitiveness is really a measure of the
country firms productivity, which they have to
relentlessly improve. This is not via the depreciation
of their home currencies but by acts of innovation,
including new technologies and new ways of doing
things and anticipating global needs.
The major exporters of T&T are in the energy
sector and who source their competitiveness from
cheaper natural resources and foreign technology.
Our on-shore exporters who are in the main assem-
blers---importing much of their inputs---are not inno-
Hence attempting to evaluate the competitiveness
of our economy by looking at the national measure,
REER, is to answer the wrong question (according
to Porter). We need to look at specific industries and
segments if we require the correct answer, which is
to diversify the economy into high productive sectors
Dr Farrell gave the example of local tomatoes
which are more expensive locally than those imported.
Devaluation may reverse this situation. There are
two problems here. The first is that agriculture in
the US benefits from subsidies and this is well known
as a brake on developing countries being able to
build lucrative agricultural industries.
Further, in T&T, agriculture is not far removed
from the kitchen-garden type and does not benefit
from scale, advanced technology or high productivity.
Couple to this the culture of the private sector of
import-markup-sell and particularly when imported
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